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Greener Pastures: Resetting the Age of Eligibility for Social Security Based on Actuarial Science

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  • Robert L. Brown
  • Shantel Aris

Abstract

We know that because of low fertility rates, rising life expectancies and the aging of the baby boom, Canada’s Old Age Dependency Ratio is rising. This will strain the sustainability of our Social Security systems and healthcare. Other countries with aging populations are raising the Age of Eligibility (AOE) for social security benefits. These include Finland, Sweden, Norway, Poland and the United Kingdom. In 2012, then Prime Minister, Steven Harper announced plans to increase the AOE for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) from 65 to 67 between 2023 and 2029. Trudeau reversed this legislation (leaving the AOE at 65) in the 2016 budget. This paper was inspired by work done in the UK for the Institute and Faculty of Actuaries State Pension Age Working Party. Our study applies their methodology onto the Canadian context. The results could be used in any country in the world, however. The UK proposal is based on actuarial and demographic logic that would see a rise in the AOE to guarantee a constant proportion of one’s adult life is spent in retirement. Thus, as life expectancy rises, there is an upward shift in the AOE for Social Security. For Canadian demographics, that constant proportion is 34 percent. Any lower value would result in an immediate need for a shift in the AOE, which we rejected. Using 34 percent triggers the first change in the AOE in 2025, which provides enough notice. The new AOE of 66 (phased in beginning in 2023 and achieved by 2025) would then be constant until 2048 when the AOE should shift to age 67 over two years. These shifts soften the rate of increase in the Old Age Dependency Ratio and bring lower OAS/GIS costs and lower required contribution rates for the CPP (both in tier 1 and the new tier 2). This, in turn, results in equity in financing retirement across generations and a higher probability of sustainability of these systems. There will also be an increase in the credibility of these systems in the public’s eye and an easing of public anxiety. One issue remains. Shifting the AOE upwards is regressive since wealthier Canadians live longer. We argue that this can be mitigated by changing the clawback formulae now used in the OAS and GIS. The Commentary concludes by proposing that the formula should become an Automatic Balancing Mechanism beyond any political interference.

Suggested Citation

  • Robert L. Brown & Shantel Aris, 2017. "Greener Pastures: Resetting the Age of Eligibility for Social Security Based on Actuarial Science," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 475, April.
    • Handle: RePEc:cdh:commen:475
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    References listed on IDEAS

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    1. Eileen Crimmins & Mark Hayward & Aaron Hagedorn & Yasuhiko Saito & Nicolas Brouard, 2009. "Change in disability-free life expectancy for Americans 70 years old and older," Demography, Springer;Population Association of America (PAA), vol. 46(3), pages 627-646, August.
    2. Kevin Milligan & Tammy Schirle, 2016. "The Pressing Question: Does CPP Expansion Help Low Earners?," e-briefs 241, C.D. Howe Institute.
    3. Palmer, Edward, 2000. "The Swedish pension reform model : framework and issues," Social Protection Discussion Papers and Notes 23086, The World Bank.
    4. Robert L. Brown, 2011. "Economic Security in an Aging Canadian Population," Social and Economic Dimensions of an Aging Population Research Papers 285, McMaster University.
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    Cited by:

    1. William B.P. Robson & Alexandre Laurin, 2019. "Less Debt, More Growth: A Shadow Federal Budget for 2019," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 531, February.
    2. William B.P. Robson & Alexandre Laurin & Rosalie Wyonch, 2018. "Righting the Course: A Shadow Federal Budget for 2018," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 503, February.

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    Keywords

    Retirement Saving and Income;

    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies

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